■ Broad markets rebounded mid-February, with Emerging Markets on top, followed by the US and Japan.
■ Cyclical sectors – driven mainly by IT stocks – outperformed defensives.
■ We observe more outflows in the US and still have inflows in Emerging Markets and, to a lesser extent, in Europe.
■ Earnings growth is expected to be higher in the US this year and lower in Europe.
IT sector top performer, technical rebound for Utilities
The best-performing sector in Europe was IT while Financials were flat; no clear bias for cyclicals against defensives as yet (compared to US).
We slightly reduced our position in Financials following the PMI peak but are keeping our overweight on Banks, and thus on Financials; we are maintaining our neutral position in insurance.
We remain overweight in Consumer Staples and Real Estate as we see a positive upside, with strong results (as opposed to last year).
Stock-picking within small-cap companies is becoming necessary, as the discount on these stocks has disappeared.
Cyclical sectors outperformed defensives
All sectors in the US market – driven by IT and Financials – were up after the second week of February, while Utilities lagged. Within IT, semi stocks were the top performers.
Earnings revisions were supportive in the US for cyclical sectors, whereas defensives were negatively revised.
We have maintained our cyclical bias, mainly through our overweight in IT stocks, followed by Financials (interest-rate views are unchanged), Industrials (some companies might be affected by Trump’s steel and aluminium tariffs but the US economy remains strong enough to digest these tariffs) and Healthcare.
We are keeping our neutral position in Energy due to a volatile market, and in Consumer Discretionary, as we do not see any upside.
Positive on cyclical and value stocks
Global growth remains strong in Emerging economies, without any major impact regarding Trump’s steel and aluminium tariffs; strong inflows can still be observed from global institutional investors towards Emerging equities.
In terms of country allocation, we have upgraded Taiwan and Korea, supported by global growth and the technology sector.
We have upgraded Brazil due to political “stability” and in order to reinforce our cyclical and value exposures; we are downgrading India due to its results of less growth momentum, taxation and banking sector issues.
In terms of sector allocation, we have downgraded Consumer Staples as they are rather expensive, without potential growth, and Utilities, which are negatively correlated to interest rates and regulation.